I spoke with David M. Offen, Esq., a Philadelphia bankruptcy lawyer, and Chad G. Boonswang, Esq. a  life insurance attorney in New Jersey, to bring you these ways you can protect your assets if you must file bankruptcy.

VB: Mr. Offen, how can someone protect their assets from seizure and sale when they file bankruptcy?

DO: First, let me share how bankruptcy works with regard to the debtor’s assets. When someone files a Chapter 7 bankruptcy petition, their assets become “property of the estate,” which is defined as “all legal or equitable interests of the debtor in property as of the commencement of the case.” This includes both real and personal property, bank and investment accounts, and money owed to or inherited by the debtor. 

The debtor’s bankruptcy “estate” will be administered by the Chapter 7 Trustee. It is the Trustee’s duty to determine whether any of your assets can be sold for the benefit of the debtor’s creditors. In other words, the Trustee is looking for assets that he can sell at a profit on behalf of creditors.

VB: That’s scary. How often are a debtor’s assets seized and sold?

DO:  Most Chapter 7 filings are “no asset” cases, in that the debtor’s attorney was successful in exempting all of the debtor’s property from the estate, leaving the Trustee with nothing to liquidate.

VB: Thank you Mr. Offen.  Can you tell us more about exemptions?

DO: Sure. Statutory “exemptions,” which are available under both federal and state law, are meant to ensure that a debtor is not left destitute following bankruptcy, but rather, retains enough assets to maintain a reasonable lifestyle after bankruptcy and at the same time receives a fresh financial start.  

These exemptions allow a debtor to retain his or her home, vehicle, jewelry, household goods, collectibles, sporting equipment and the like. Exemptions have limits, so it is important for a debtor to work with an attorney to assess the value of all assets so that everything the debtor wishes to retain can be exempted from the bankruptcy estate.  

VB: How does the debtor value his or her assets, for the purpose of bankruptcy?

DO: It varies. For regular household goods, I tell my clients to estimate what they would get at a yard sale. For jewelry, fine art, and other collectibles, an appraisal is required. For vehicles, I use Kelley Blue Book or NADA. For real property, I tell my clients to call a realtor to get market value.

VB: What can someone do if property they want to keep is not exempt?  

DO:  If a debtor’s interest in certain assets cannot be wholly exempted, it may be possible to file a bankruptcy petition and still keep that asset. For example, if considering the market value of a debtor’s home, the equity exceeds the amount of allowable exemption, the debtor can file under Chapter 13 instead of Chapter 7 and, over time, pay creditors what they would have received had the debtor filed a Chapter 7 and the Trustee seized and sold his or her home.  

VB: Is there any type of property that is automatically exempt from the estate?

DO: Yes – certain assets are not considered “property of the estate” and therefore cannot be seized by the Trustee.  These include, generally, funds paid into a pension as well as educational trusts, within limits.

VB:  Mr. Boonswang, what about life insurance?

CB: Life insurance is not automatically exempt and you need to take a look at the policy to determine whether it is an asset the Trustee might seize. Term Life policies have no present cash value so do not need to be exempted. On the other hand, Whole Life policies do have present cash value and therefore are personal assets that a debtor needs to disclose. The debtor’s attorney will need to exempt Whole Life policies from the bankruptcy estate.

VB:  Okay, well, what if someone files bankruptcy and then is the beneficiary of a life insurance policy?

CB:  Good question, because this does happen.  Dave?

DO: Any life insurance proceeds a debtor receives within 180 days of filing bankruptcy is part of the bankruptcy estate, which means that those proceeds could be seized to pay creditors. So, a debtor must inform his or her attorney if receiving life insurance proceeds during or after the bankruptcy filing. Hopefully, there is some leftover exemption the debtor’s attorney could apply to protect the proceeds from seizure by the Trustee.

VB: Thanks for all this information, gentlemen.

DO: It was my pleasure

CB: You’re welcome.  Hope it helps.

Veronica Baxter is a writer, blogger and legal assistant working in and around Philadelphia, Pennsylvania.